More bang for the yen? Japan's financial reforms are more cosmetic than real.

• Author: Oakes, Michael J.

As Asian currencies and equities dropped last year, International Monetary Fund analysts and global fund managers discovered yet another important "Asian value": denial. Thai banks "can't imagine what will happen if they tell you the truth," a director of a Hong Kong-based investment management company told Dow Jones News Service in October. "As long as they still say there are no problems, I say stay away."

This failure to face reality is largely the result of an inability to define reality. Lax reporting and disclosure standards make a true accounting of Asia's bad debts extremely difficult. When capital allocation decisions are based on political rather than financial criteria, the incentives are to keep such reporting ambiguous.

But don't ask Indonesia's President Suharto and his Asian colleagues to shoulder all the blame on this point. After all, they had a highly regarded model: Japan.

Japanese government officials and business leaders have been suffering their own extended case of denial since the bursting of an economic bubble in 1991. For nearly the entire past decade, bad loans and stock market losses have been swept under the nation's tatami mats. The reflex to cover up has been aided by vague reporting practices and widespread fears that a public comeuppance would reveal too much about the links between bad loans and government officials. The nation's leaders also simply waited and hoped that the export machine, hero of so many previous domestic crises, would lift Japan's economy again, and that rising equity and real estate markets would make all bad things go away.

Unlike Thailand, Indonesia, and the others, Japan's currency devaluation stretched out over the past three years (rather than about three weeks), from a peak of [yen] 80 to the dollar in 1995 to nearly [yen] 135 in January. But Japan shares with its less-developed Asian neighbors the same kind of outdated, autocratic financial sector, leashed closely to politicians and their bureaucratic henchmen.

Modernizing and opening up these institutions are the ostensible goals of Japan's "Big Bang." The namesake of more narrowly focused security-market deregulation in England in the mid-1980s, Japan's Big Bang implies that a thunderous liberalization of the financial sector is taking place. That's what Japanese leaders want everyone to believe, but it's not that at all.

True, the package of official reforms will induce more competition in banking and securities markets and offer attractive opportunities for foreign financial expertise. But critical components of the fossilized structure responsible for a long list of financial market problems remain beyond the reach of reform.

Some of the most significant change is promised by two important measures. Foreign exchange controls will be...